California Pension Fund Alarm

Recently, concerns have been mounting regarding the management of California’s largest public pension fund, which has left many retirees feeling anxious.

Retired civil servants have been urging for an independent audit of the California Civil Service Retirement System, often referred to as CalPers, which manages around $500 billion. They’ve also attempted to persuade state lawmakers to appoint inspectors to oversee its operations, but those efforts haven’t gained traction. Now, they’re taking action themselves.

In a notable move, these retirees have decided to hire a forensic pension investigator to scrutinize the fund’s financial dealings, especially regarding its substantial investments in major Wall Street firms and the high fees associated with their underwhelming returns.

“We’re going to take this on ourselves,” stated Margaret Brown, a former CalPers board member and current president of the retired California Civil Service Association, which boasts approximately 22,000 members.

Widespread retirement concerns are prevalent nationwide, significantly impacting CalPers’ 2.3 million members. Data from the National Conference on Public Employee Retirement Systems reveals that CalPers’ obligations to beneficiaries are only at 75%, which is below the national average of 83.1%.

Calpers has lagged in investment returns compared to other pension funds. Although the fund improved slightly with a 9.3% increase last year, it still trailed behind the average public pension fund return of 9.47% and fell short of the benchmark return of 10.3%.

Publicly traded stocks remain one of the better-performing assets for CalPers. However, the fund has increased its involvement in costly and often opaque private investments, including private equity. As of the latest annual financial report, 15.6% of CalPers’ portfolio is now in private equity, up from a previous target of 10% in 2023. Over the past 1, 5, 10, and 20 years, these investments have only met benchmarks in three of those timeframes.

Interestingly, many large institutional investors have started to divest from private equity due to falling performance. A report from S&P Global Analysts indicated that, given the investments’ opaqueness, assessing risks compared to returns can be quite difficult.

Similar concerns about limited transparency in state pension funds, particularly around private equity, have arisen in other states like Ohio and Minnesota.

Brown, who served on the CalPers Committee from 2018 to 2022, highlighted her worries. “Members tuned into CalPers are really anxious about their investments and that 75% funding rate,” she noted. The decision to increase investments in private equity raises red flags for her, especially when other savvy investors are scaling back.

“Does anyone really think CalPers knows more than major global investors?” she questioned. “Or are they just hoping private equity will save the day for the pension fund? I suspect it’s the latter.”

JJ Jelincic, another former CalPers board member who now oversees health benefits for retired civil servants, expressed similar worries about the growing secrecy surrounding the fund’s operations. “It’s getting harder and harder to understand their actions,” he remarked.

When asked for comment on the new investigation, CalPers spokesperson James Scullary declined but defended the increased allocation to private equity, claiming it has outperformed all other asset classes over the last two decades, yielding a 12% annual return. Yet, he acknowledged this return didn’t meet the benchmark for that asset class during that timeframe.

As for the 75% funding status, Scullary assured that CalPers is prepared to meet its obligations to pension beneficiaries “for the next few years,” asserting their commitment to serving members’ best interests.

Brown and Jelincic have plans to gather funds from retired employees and others interested in scrutinizing the pension fund, aiming to hire Edward Cider, a forensic pension investigator, as previous attempts to oversee the fund have fallen flat.

These past efforts included a push to get state legislators to order an audit and establish an inspector to oversee the fund’s activities, which, unfortunately, did not succeed. Cider anticipates challenges ahead, given his previous experience with other pension investigations.

Many large public pension funds now have inspectors overseeing their operations. Following a scandal with the New York State Common Retirement Fund in 2008, political figures emphasized the necessity of preventing corruption and establishing oversight to uphold trust.

CalPers maintains that oversight comes from an independent auditor and a board of directors. However, when Gerincic requested access to an internal audit, he was told it would be hard to evaluate due to some individuals being exempt from disclosure, citing attorney-client privileges related to private equity documents.

CalPers’ Scullary characterized Brown and Jelincic as disgruntled former board members, suggesting that while they desire improved funding levels beyond the current 75%, there is no need to panic.

As for the costly private equity partnerships, Paternoster stated, “We focus on ensuring people are working hard for you. Fees are not our primary concern.” Records indicate that in the previous fiscal year, private equity managers were compensated with $569 million in investment fees.

David Soares, a former prosecutor who retired in 2016, voiced his concerns, saying he feels his pension might be at risk. “It seems like the fund is being drained through excessive fees to outside managers, leaving us with far less than we should have,” he said.

CalPers has undergone significant upheaval over the last decade, with its former CEO being sentenced to prison due to corruption charges related to the fund. Since 2020, leadership instability has been evident, with several chief investment officers leaving their positions unexpectedly, some amidst controversies.

In one instance, a state judge determined that CalPers had violated California’s Open Meeting Act, although Scullary asserted the fund was operating within legal boundaries.

Cider’s recent investigation into three public pension funds has revealed underreported fees, such as in the Minnesota Teacher Retirement Association case, where sizable sums paid to private equity managers were initially obscured. Following his findings, the fund began to disclose these costs, which amounted to $80 million in 2024.

Sarah Swenson, a spokesperson for the Minnesota pension fund, noted that this new fee disclosure practice came from long-standing efforts, something she highlighted as a positive development.